Base metal prices have seen a decline after a strong rally in the second quarter of 2024. Copper and aluminum have particularly given back most of their year-to-date gains, driven by concerns over weak demand and economic uncertainty.
However, BofA Securities suggests that the downside risk to base metal prices may be limited from this point forward. The brokerage anticipates that various factors, including potential Federal Reserve rate cuts, a rebound in demand post-summer, and the resolution of trade disputes, could support metal prices into 2025.
The most pressing issue for base metal prices is the current slowdown in manufacturing activity, which has been evident globally. Weak sentiment among manufacturers has led to a reduction in industrial inventories, exacerbating the downward pressure on prices.
Despite this, BofA highlights that the fundamentals for metals remain relatively robust. Physical markets are tight, as evidenced by high copper premiums in the U.S. and Europe, and supply issues for copper and aluminium persist.
Manufacturing activity
Recent Purchasing Manager Surveys indicate a downturn in manufacturing activity in the U.S., Europe, and China. For example, China's NBS manufacturing PMI remained in contractionary territory at 49.4 in July, reflecting weaker demand and reduced production. Similarly, the U.S. Institute of Supply Management (ISM) reported subdued demand and declining production execution.
Inventories and premia
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Despite the recent inventory build-up in China, particularly in SHFE and bonded warehouses, inventories are still on the lower end of longer-term ranges. Copper premiums in China have risen from -$20/t to $60/t, suggesting a tentative return of buyers to the market. This resilience in physical markets supports the view that further price declines may be limited.
Role of Federal Reserve policy
The Federal Reserve’s monetary policy is a critical factor influencing base metal prices. The tight monetary conditions reported in the latest U.S. PMI are pressuring manufacturers. However, anticipated Fed rate cuts could alleviate some of these pressures. Lower rates are expected to benefit other sectors, including construction, which is a significant consumer of metals.
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Fed rate cuts
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BofA Securities forecasts that the Fed may initiate rate cuts starting in September, with further reductions anticipated through mid-2026. Historical data shows that easing cycles can impact metals prices positively if accompanied by a rebound in manufacturing activity.
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Thus, a more accommodative monetary policy could support metal prices, provided there is a concurrent improvement in demand.
Trade disputes and geopolitical risks
Trade disputes, particularly between the U.S. and China, are an ongoing concern for metal markets. Both U.S. presidential candidates are expected to continue policies that prioritize reducing reliance on rivals and advancing U.S. leadership in high-tech industries. The extent of tariffs and trade barriers will significantly influence the metals market.
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Impact of trade policies
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If trade disputes escalate into broader trade wars, this could disrupt metal markets and impact global demand.
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However, BofA Securities notes that if trade tensions do not escalate further, downside risks to base metal prices may be contained.
Outlook for base metal prices
Given the current economic environment, BofA Securities maintains a constructive outlook on base metal prices into 2025. Key factors supporting this view include:
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Potential rebound in demand
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The usual post-summer rebound in demand could provide support for metal prices. Additionally, if the Chinese economy shows signs of stronger growth and restocking activity picks up, this would further bolster prices.
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Support from green technologies
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Continued investment in green technologies and the energy transition is expected to support metals such as copper and aluminium. This trend is likely to remain a key driver for long-term metal demand.
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